After a five-year downturn, the world’s least-loved commodity is burning brightly again.
The price of coking coal has just topped $300 a tonne for the first time since 2011 as steel mills in Asia scramble for supplies,
Premium hard Australian coking coal rose 6 per cent to $307.2 a tonne on Tuesday, extending gains since April to 250 per cent, according to a price assessment from the Steel Index.
The last time coking – this year’s best performing commodity – was trading at these levels was in 2011 after severe flooding disrupted supplies from Australia, a leading producer.
The dramatic rebound is a remarkable turnaround in fortunes for coal, which has been shunned for years by investors because of its poor performance and reputation as the planet’s dirtiest fossil fuel.
Coal’s renaissance has driven by production curbs in China, the world’s biggest consumer of commodities and also largest steel-making nation. The cutbacks were introduced in April by policymakers in Beijing in an effort to improve the profitability of the country’s heavily indebted coal industry.
The curbs have also boosted the price of thermal coal, burnt in power stations to generate electricity. The fuel has more doubled in the past six months and was assessed at almost $110 on Monday by Argus Media.
Rocketing prices are a boon for major producers, which include Anglo American and Glencore. The rising profitability of their mines has boosted cash flow helping them pay down debt and potentially putting them a position to resume dividend payments next year.
But it is also causing problems. Reports on Tuesday claimed Anglo American, the FTSE 100 miner, had rejected a bid for two Australian coking coal mines from Apollo Global Management and Xcoal Energy & Resources because it did not reflect the remarkable recovery in prices.
The latest gains for coking coal came as Asian steel-makers rushed into the market to buy some of the latest remaining cargoes for shipment in December. A string of disruptions at Australian mines have reduced the amount of material to buy, forcing prices higher and creating a scramble for supplies, said traders.
Miners and industry watchers do not think the price surge can continue for much longer because it will trigger a supply response from miners mothballed during the downturn. Glencore announced last week it would restart production at the Integra underground mine in New South Wales, Australia. A number of other mines in state and neighbouring Queensland also have plans to reopen.
Chinese policymakers are also started to fret about the coal market surge because of the impact it could have on domestic power prices.
At the end of China’s state planner National Development and Reform Commission relaxed production controls at 800 mines, a move that could theoretically increase output by 300m tonnes. In addition, the Zhengzhou Commodity Exchange has raised fees several times in a bid to curb speculative buying.
“All of these factors suggest thermal coal prices should start to roll over,” said analysts at Macquarie in a recent report.
However, it could take time for China’s coal mines to ramp up production again and meet demand which is higher because power stations and steel mills are restocking ahead of the winter.
Chart courtesy of Bloomberg
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